How the US Dollar Will Be Replaced

http://www.zerohedge.com/news/guest-post-how-us-dollar-will-be-replaced

After being immersed in the world of alternative economic analysis for several years, it sometimes becomes easy to forget that most people do not track forex markets, or debt to GDP ratio, or true unemployment, or hunch over IMF white-papers highlighting subsections which expose the trappings of the globalist ideology.  Sometimes, you just assume the average person knows what the heck you are talking about.  This is, of course, a mistake.  However, it is a mistake that is borne from the inadequacy of our age and our culture, and is not necessarily a product of weak character, either of the analyst, or the casual reader.   

The great frustration of being actively involved in the Liberty Movement is the fact that many people are rarely on the same page (or even the same book) during political and economic discussion.  Where we see the nature of the false left/right paradigm, they see “free democracy”.  Where we see a tidal wave of destructive debt, they see a “responsible government” printing and spending in order to protect our “best interests”.  Where we see totalitarianism, they see “safety”.  Where we see dollar devaluation, they see dollar strength and longevity.  Ultimately, because the average unaware citizen is stricken by the disease of normalcy bias and living within the doldrums of a statistical fantasy world, they simply have no point of reference by which to grasp the truth when exposed to it.  It’s like trying to explain the concept of ‘color’ to a man who has been blind since birth.

Americans in particular are prone to reactionary dismissal when exposed to facts that disrupt their misconceptions.  Our culture has experienced a particularly prosperous age, not necessarily free from all trouble, but generally spared from widespread mass tragedy for a generous length of time.  This tends to breed within societies an overt and unreasonable expectation of ease.  It generates apathy, and laziness.  A crushing blubberous slothful cynicism subservient to the establishment and the status quo.  Even the most striking of truths struggle to penetrate this smoky forcefield of duplicitous funk.

In recent articles, I have outlined the very immediate dangers of several potential economic events that are likely to take place this year, including the exit of peripheral countries from the European Union, the conflict between austerity and socialist spending in France and Germany, the developing bilateral trade agreements between China and numerous other countries which cut out their reliance on the U.S. dollar, and the likelihood that the Federal Reserve will announce QE3 before the end of 2012.  All of these elements are leading in one very particular direction:  the end of the Greenback as the world reserve currency. 

In response to these assertions I have received letters from some people (some of them indignant) questioning how it would be even remotely possible that the dollar could be replaced at all.  The concept is so outside their narrow world view that many cannot fathom it. 

To be sure, the question is a viable one.  How could the dollar be unseated?  That said, a few hours of light research would easily produce the answer, but this tends to be too much work for the fly-by-night financial skeptic.  Sometimes, the job of the alternative analyst is to make the obvious even more obvious. 

So, let’s begin…

The Dollar A Safe Haven?

This ongoing lunacy is based on multiple biases.  For some, the dollar represents America, and a collapse of the currency would suggest a failure of the republic, and thus, a failure by them as individual Americans who live vicariously through the exploits of their government.  By extension, it becomes “patriotic” to defend the dollar’s honor and deny any information that might suggest it is on a downward spiral. 

Others see how the investment world clings to the dollar as a kind of panic room; a protected place where one’s saving will be insulated from crisis.  However, just because a majority of day trading investors are gullible enough to overlook the Greenback’s pitfalls does not mean those dangerous weaknesses disappear. 

There is only one factor that shields the dollar from implosion, and that is its position as the world reserve currency.  Without this exalted status, the currency’s value vanishes.  Backed by nothing but massive and unpayable debt, it sits frighteningly idle, like a time bomb, waiting for the moment of ignition.  

The horrifying nature of the dollar is that it is only valuable so long as foreign investors believe that we will pay back the considerable debts that we (the American taxpayer at the behest of our criminally run Treasury) owe, and that we will not hyperinflate in the process.  If they EVER begin to see their purchases of dollars and treasuries as a gamble instead of an investment, the façade falls away.  Yet again this year Congress and the Executive Branch are “at odds” over the expansion of the debt ceiling, which has been raised to levels beyond the 100% of GDP mark:

http://www.nytimes.com/2012/05/17/us/politics/obama-presses-congress-to-act-on-his-priorities.html

Barack Obama has made claims that increases in the debt ceiling are “normal”, and that most presidents are prone to hiking the barrier every once in a while.  Yet, back in 2006, when George W. Bush increased debt limits, Obama had this to say:

"The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills…Instead of reducing the deficit, as some people claimed, the fiscal policies of this administration and its allies in Congress will add more than $600 million in debt for each of the next five years…Increasing America's debt weakens us domestically and internationally. Leadership means that 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

For once, Barack and I agree on something.  Too bad the man changes his rhetoric whenever it’s to his advantage. 

Today, Obama now asserts that raising the debt ceiling is not an opening for more government spending, but an allowance for the government to pay bills it has already accrued.  This is disingenuous and hypocritical prattle.  Obama is well aware as are many in Congress that as long as the Federal Government is able to raise the debt ceiling whenever it suits them, they can increase spending with wild abandon.  It’s like handing someone a credit card with no maximum limit.  For most men, the temptation would be irresistible.  Therefore, one can predict with 100% certainty that U.S. spending will never truly be reduced, and that our national debt will mount in tandem until we self destruct.

How has this trend been able to continue for so long?  Our private central bank has created the fiat machine by which all economic depravity is possible.  Currently, the Federal Reserve is the number one holder of U.S. debt.  The Federal Reserve creates its own capital.  It prints its wealth from thin air.  The dollar, thus, has become its own lynchpin.  The secretive institution which has never been subject to a full audit is now monetizing endless debt mechanisms with paper promises.  What value would any intelligent investor put on such a fraudulent economic system?           

The epic dysfunction of the dollar is rooted in its reliance on perception rather than tangible wealth or strong fundamentals.  It is, indeed, like any other fiat unit, with all the inevitable pitfalls built into its structure.

Ironically, the value of the Dollar Index is measured not by its intrinsic buying power, or its historical buying power, but its arbitrary buying power in comparison with other collapsing fiat currencies. 

The argument I hear most often when pointing out the calamitous path of the dollar is that it is the go-to safe haven in response to the crisis in Europe.  What the financially inept don’t seem to grasp is that the shifting of savings back and forth between the euro and the dollar is just as irrelevant to our currency’s survival as it is to Europe’s.  BOTH currencies are in decline, and this is evident by the growing inflationary pressures on both sides of the Atlantic.  Ask any consumer in Greece, Spain, France, or the UK how shelf prices have changed in the past four years, and they will say the exact same thing as any consumer in the U.S.; costs have gone way up.  Therefore, it makes sense to compare the dollar’s value not to the euro, or to the Yen, but something more practical, like the dollar of the past….

In 1972, just as Nixon was removing the dollar from the last vestiges of the gold standard, a new car cost an average of $4500.  A home cost around $40,000.  A gallon of gas was .36 cents.  A loaf of bread was .25 cents.  A visit to the doctor’s office was $25.  Wages were certainly lower, but they kept much better pace with the prices of the era.  Today, the gap between wages and inflation is insurmountable.  The average family is unable to keep up with the flashflood of rising prices.

According to the historic buying power of the dollar, the currency is a poor safe haven investment.  With the advent of bailout efforts and debt monetization through quantitative easing, its devaluation has been expedited dramatically.  The Fed has left the door open for what I believe will be a final destructive round of publicly announced QE, weakening the dollar to near death:

http://www.reuters.com/article/2012/05/16/us-usa-fed-idUSBRE84F12320120516

The question then arises; why do foreign countries continue to buy in on the greenback?

The Dollar Dump Has Already Begun

One of my favorite arguments by those defending the dollar is the assertion that no foreign country would dare to dump the currency because they are all too dependent on U.S. trade.  To answer the question above, the reality is that foreign countries ARE already calmly and quietly dumping the dollar as a global trade instrument. 

To those people who consistently claim that the dollar will never be dropped, my response is, it already has been dropped!  China, in tandem with other BRIC nations, has been covertly removing the greenback as the primary trade unit through bilateral deals since 2010.  First with Russia, and now with the whole of the ASEAN trading bloc and numerous other markets, including Japan.  China in particular has been preparing for this eventuality since 2005, when they introduced the first Yuan denominated bonds.  The bonds were considered a strange novelty back then, especially because China had so much surplus savings that it seemed outlandish for them to take on treasury debt.  Today, the move makes a whole lot more sense.  China and the BRIC nations today openly call for a worldwide shift away from the dollar:

http://news.xinhuanet.com/english2010/indepth/2011-08/06/c_131032986.htm

With the global proliferation of the Yuan, and the conversion of the Chinese economy away from dependence on exports (especially to the West) towards a more consumer based system, the Chinese have effectively decoupled from their reliance on U.S. markets.  Would a collapse in the U.S. hurt China’s economy?  Yes.  Would they still survive?  Oh yes.  Far better than America would, at least…

In 2008, I warned of this development and was attacked on all sides by more mainstream economists and Keynesian proponents who stated that such a development was impossible.  Today, it’s common knowledge that our primary creditors are “diversifying” away from the dollar, though MSM talking heads and those who parrot them still claim that this is not a threat to our economy.

To be clear, the true threat to the dollar’s supremacy is not only due to the constant printing by the private Federal Reserve (though that is a nightmare in the making), but the loss of faith in our currency as a whole.  The Fed does not need to throw dollars from helicopters to annihilate our currency; all they have to do is create doubt in its viability.

The bottom line?  A dollar collapse is not “theory” but undeniable fact in motion at this moment, driven by concrete actions on the part of the very nations that have until recently propped up our debt obligations.  It is only a matter of time before the dollar diminishes and fades away.  All signs point to a loss of reserve status in the near term.

What Will Replace The Dollar?

My next favorite argument in defense of the Greenback is the assertion that there is “no currency in a position to take the dollar’s place if it falls”.  First of all, this is based on a very naïve assumption that the dollar will not fall unless there is another currency to replace it.  I’m not sure who made that rule up, but the dollar is perfectly able to be flushed without a replacement in the wings.  Economic collapse does not follow logical guidelines or the personal pet peeves of random man-child economists.

Though, to be fair, and to educate those unaware, there IS a replacement already conveniently ready to roll forward.  The IMF has for a couple of years now openly called for the retirement of the dollar as the world reserve currency, to be supplanted by the elitist organization’s very own “Special Drawing Rights” (SDR’s):

http://www.guardian.co.uk/business/2011/feb/10/imf-boss-calls-for-world-currency

The SDR is a paper mechanism created in the early 1970’s to replace gold as the primary means of international trade between foreign governments.  Today, it has morphed into a basket of currencies which is recognized by almost every country in the world and is in a prime position to take the dollar’s place in the event that it loses reserve status.  This is not theory.  This is cold hard reality.  For those who claim that the SDR is not considered a “real currency”, they should probably warn the U.S. Post Office, which now uses conversion tables that denominate costs in SDR’s:

http://pe.usps.com/text/imm/immc3_007.htm

So, now that we know a replacement for the dollar is ready to go, the next obvious question would be:

Why would global elites destroy a useful monetary tool like the dollar?  Why kill the goose that "lays the golden eggs"?

People who ask this question are simply unable to see outside the fiscal box they have been placed in.  For global bankers, a paper currency is not important.  It is expendable. Like a layer of snake skin; as the snake grows, it sheds the old and dawns the new. 

At bottom, men who promote the philosophies of globalization greatly desire the exaltation of a global currency.  The dollar, though a creation of a central bank, is still a semi-sovereign monetary unit.  It is an element that is getting in the way of the application of the global currency dynamic.  I find it rather convenient (at least for those who subscribe too globalism) that the dollar is now in the midst of a perfect storm of decline just as the IMF is ready to introduce its latest fiat concoction in the form of the SDR.  I find the blind faith in the dollar’s lifespan to be rife with delusion.  It is not a matter of opinion or desire, but a matter of fact that currencies in such tenuous positions fall, and are in the end replaced.   I believe that the evidence shows that this is not random chance, but a deliberate process, leading towards the globalist ideal; total centralization of the world under an unaccountable governing body which operates a global monetary system utterly devoid of transparency and responsibility.   

The dollar was a median step towards a newer and more corrupt ideal.  Its time is nearly over.  This is open, it is admitted, and it is being activated as you read this.  The speed at which this disaster occurs is really dependent on the speed at which our government along with our central bank decides to expedite doubt.  Doubt in a currency is a furious omen, costing not just investors, but an entire society.  America is at the very edge of such a moment.  The naysayers can scratch and bark all they like, but the financial life of a country serves no person’s emphatic hope.  It burns like a fire.  Left unwatched and unchecked, it grows uncontrollable and wild, until finally, there is nothing left to fuel its hunger, and it finally chokes in a haze of confusion and dread…

Is Gold In a Bubble?

Respected investment fund manager and author of the 'Gloom, Boom & Doom Report' has advised buying gold again and says that 25% of a portfolio should be in precious metals. 

He says another move to the downside of gold is possible, but worldwide printing of money assures long term support.

Swiss born and educated Marc Faber’s contrarian voice is common on CNBC and Bloomberg TV when it comes to big-picture macro forecasting and an astute historical perspective. However, outside of the specialist financial media his astute historical perspective remains relatively unknown.

Interviewed at his residence in Hong Kong by Hard Asset Investor, Faber made the excellent point that the majority of the investment public continues not to own gold. Especially, when compared to say one popular tech stock - such as Apple.

XAU/EUR Currency Chart – (Bloomberg)

Faber said that he attends lots of conferences and usually asks the audience, “How many of you own gold?” Normally, hardly anyone owns it. I’ve been to conferences with thousands of people attending, and nobody owned any physical gold.”

Faber believes that this shows that gold is not a bubble.

“When you went to an investment conference in 1989, everybody owned Japanese stocks. And in 2000, everybody owned tech stocks. That is the bubble, when the majority of market participants own an asset. I think there are more people that own Apple stock than gold.”

Faber points out that while the price of gold has risen by quite a lot in the last 13 years (from $252/oz in 1999), the debt situation of the western world has deteriorated dramatically.

“People say the price of gold is in a bubble stage and it is up substantially from the lows in 1999, which was, at the time, around $252 per ounce. But at the same time, we had an explosion of debt, not just government debt, but private sector debt, and an explosion of unfunded liabilities such as in the pension fund industry, and not just with Medicare, Social Security and Medicaid.”

“So now, 12 years after the gold’s low, we are essentially in a situation where maybe the price of gold should be much higher because the economic and financial conditions are worse than they were 12 years ago.”

http://www.zerohedge.com/contributed/2012-18-04/gold-bubble-%E2%80%9Cmore-people-own-apple-stock-gold%E2%80%9D

What Happens When All the Money Vanishes Into Thin Air?

Submitted by Charles Hugh Smith from Of Two Minds

Issuing debt and printing money do not create wealth. All they can create is a temporary illusion of wealth.

I could have written "if all the money vanishes," but that would be misleading, for all unbacked money will most certainly vanish into thin air. The only question is when, not if. Frequent contributor Harun I. explains why:

Those who fail to understand that the Status Quo is impossible to maintain will be shocked when the disintegration is undeniable. But the whole thing was perverse to begin with. Words like capitalism and meritocracy are thrown around to make people feel good when, in reality, we have never owned anything, not even ourselves.

How can we own ourselves when the very thing we use for subsistence can be cheapened or reduced to nearly nothing, not by market forces, but by central banks acting at the behest of governments? When a person does not control his labor, what is he?

I have been studying the monetary history of the world for the past few weeks. I can tell you that the second oldest profession is currency debasement. Nothing is new.

Of course, this should be no surprise, everything is cyclical. Humankind is like the trader looking for the Holy Grail. There is no perfect monetary system, there is only better and worse. And this one ranks among the worst. 

I wait patiently for people to come to the understanding that the only way for everyone to get their money would be to destroy its value completely, meaning that a loaf of bread would be a million dollars. If a small fraction of what has to be printed to keep the system afloat has caused the price spikes in energy and everything else, imagine what happens as the disintegration picks up speed.

As the exponential debt curve moves closer to the pure vertical, the rate at which debts come due will approach infinity. Of course, while this is the ultimate mathematical outcome, the reality is that the system will collapse before this point is reached. But don't think governments will throw in the towel. If history holds true the rise of a totalitarian government is just over the horizon.

Then there are those who get it right and wrong in the same breath. John Mauldin, in a KWN interview, thanked Europe for keeping the heat off the US. Mr. Mauldin apparently does not understand that our monetary policies are transferring what we do not want to the rest of the world, at least for a time, but not much more.

How many more food items be made smaller and sold at the same price? In effect this is a slow starvation of those at the margin. The 46 million American souls on food stamps will soon find their food stamps to be worthless.

Those who assert that a credit system cannot go hyper-inflationary may not have thought through the exponential effects on the relationship of the debt and productivity curves within the context of all money is debt and the only way to create money is for debt to be created. Eventually the debt curve accelerates away from the productivity curve, then the productivity curve collapses all together. Sovereign debt crises caused by governments stepping in to keep the debt system going is the last stage. Then comes the debt/currency collapse.

Even if the Fed stopped printing money, I fail to see the difference between too much money that is worth nothing, and no money at all. It's not going to matter to a starving man that a loaf of bread is $1 million and he is a dollar short, or if it's $1 and he is a dollar short.

Thank you, Harun. Many observers have addressed the key concept here, which boils down to this: paper money is an abstract representation of the real world.

This can be explained by a simple example. If there is $100 in the money supply, and $100 of goods and services to trade, then $1 will be exchanged for $1 of goods and services. If the money supply suddenly increases by $100, then the value of the existing $100 declines by half, as the money supply is now $200 and the supply of goods and services remains unchanged. Thus it now takes $2 to buy what $1 once bought in goods and services.

Holders of the currency have had half the value of their currency (what we call purchasing power) stolen by the central bank that issued the additional $100 in money supply.

Here is the primary point: issuing debt and printing money do not create wealth. All they can create is a temporary illusion of wealth.

(This is drawn from Chapter One of Resistance, Revolution, Liberation: A Model for Positive Change; you can read Chapter One for free.)

Here is another example. Let's say that a small group is stranded on a desert island that supports a handful of coconut palms. Each palm produces a limited number of coconuts each season. To facilitate trade, the group issues a currency that represents one coconut. (Lacking a printing press, they have to laboriously carve out a pattern on a rock to imprint a difficult-to-counterfeit stamp on the currency.)

This system works well, as the currency issued matches the number of coconuts harvested annually (for simplicity's sake, let's say that's 100). 100 pieces of currency are issued to match the 100 coconuts that exist in the real world. The currency (let's call it the quatloo) is an abstract representation of the goods available, i.e. the coconuts.

But then a wise-guy (i.e. the "central banker" on the island) realizes that if he prints another 100 quatloos, he and his buddies can buy up all the coconuts and fish without having created any real goods in the real world: the abstraction is used to con people out of their real coconuts.

The residents quickly catch on, and the "price" of coconuts rises to 2 quatloos. The wise-guy is addicted to the scam, and so he prints 1,000 quatloos, and then issues quatloos in denominations of 1 million.

Soon enough, each coconut costs 1 million quatloos.

Creating debt and paper money does not create real goods and services or real wealth.

As Harun observed, we have been promised trillions of dollars that can supposedly be traded for trillions of dollars in real goods and services, and buyers of bonds have been promised trillions of dollars of the same artificial exchange of paper for real goods.

Just as on the desert island, the growth of actual goods in the real world lags the growth of money, i.e. abstract representations of real goods.

The U.S. Central State (Federal government) has borrowed and squandered $6 trillion over the past four years, and the actual production of goods and services has not risen at all when adjusted for inflation. The central bank (the Federal Reserve) has expanded its balance sheet by $2 trillion, and yet all the assets it have tried to force higher are actually lower when measured in real goods such as gold, oil, wheat, etc.

It's easy to expand the money supply and difficult to expand the actual production of real goods in the real world. Expanding the money supply and issuing debt that lacks collateral is just like printing quatloos on the desert island: you can print a million quatloos but that doesn't create a single additional coconut.

If you print enough quatloos, then people will no longer accept them in exchange for coconuts. You will actually need a real coconut to exchange for fish.

This is why Greek towns are reportedly reverting to barter, the exchange of real goods for other real goods. We can anticipate that silver and gold will soon enter the barter as means of exchange that can't be counterfeited or printed by wise-guys (central bankers).

We can also anticipate the issuance of letters of credit, a practice that stretches back to the trading fairs of Medieval Europe, as described by Fernand Braudel in his three-volume history of early capitalism, The Structures of Everyday Life (Volume 1), The Wheels of Commerce (Volume 2) and The Perspective of the World (Volume 3).

Since gold was in insufficient supply, letters of credit were issued and accepted on a basis of trust. At the end of the great fairs, the letters were exchanged and payment of balances due made in gold or silver. Thus 99 coconuts could be traded for 100 dried fish via letters of credit and the balance due in gold or silver was the value of 1 dried fish--a mere 1% of the total value of goods exchanged.

This is what happens when abstract representations, i.e. "money," vanish into thin air. Alternative systems of exchanging goods and services arise: actual goods are exchanged via barter, tangible concentrations of value that cannot be counterfeited such as gold and silver are used as a means of exchange, letters of credit or equivalent are traded and settled with tangible goods or gold/silver, and eventually, a means of exchange ("money") that is backed by tangible goods in the real world that can be trusted to actually represent the value being traded might enter the market.

That which is phantom will vanish into thin air, while the real goods and services remain to be traded in the real world.

H/T: http://www.zerohedge.com/news/guest-post-what-happens-when-all-money-vanishes-thin-air

Quantitative Easing (QE) Explained

Sound Money

Ron Paul before the United States House of Representatives, Committee on Financial Services, Hearing to Receive the Annual Testimony of the Secretary of the Treasury on the State of the International Financial System, March 20, 2012

Mr. Chairman, I thank you for holding this hearing on the state of the international financial system. The Treasury Secretary has neglected to appear to testify on this topic for several years, so I hope the committee will treat this topic with the importance it deserves during this Congress. It is especially important because of the work the G20 has undertaken on global currency reform since 2008. What role US representatives have played in these negotiations is unknown to Congress, nor do we know what global currency reform initiatives are being discussed. I fear that the G20 negotiations will result in a fait accompli that will be forced upon the American people with no opportunity for input or debate.

Ever since the closing of the gold window by President Nixon in 1971, the unbacked US dollar has served as the world's reserve currency. No longer constrained by being required to exchange dollars for gold, the US government has been able to fund its fiscal profligacy with trillions of dollars of new money created out of thin air. The only constraint on government spending is the willingness of investors to continue to purchase the Treasury debt issued to fund the government's massive fiscal deficits.

The federal government's fiscal profligacy has caused the national debt to skyrocket to well over $15 trillion. Even with nearly a trillion dollars of daylight under the current debt ceiling, it is highly likely that the federal government will reach this limit before the November elections. Foreign nations, especially our major creditors such as China, are watching keenly to see if Congress is serious about getting spending under control. Foreign creditors hold $5 trillion of Treasury debt, debt which is becoming increasingly devalued as the federal government runs trillion-dollar deficits and the Federal Reserve continues its trillion-dollar quantitative easing programs. Another increase in the debt ceiling would signal that Congress is not serious about reining in spending and would foreshadow a further decrease in the value of the dollar.

Unhappiness at this current state of affairs has led to calls to replace the current global dollar standard with a new global currency system. Many of the proposals work from the assumption that national governments cannot be trusted to manage currencies in a responsible manner, and that only an international organization such as the International Monetary Fund (IMF) can provide a stable global reserve currency. These proposals dig back to the roots of the discredited Bretton Woods system, only instead of resurrecting the flawed gold-exchange standard they propose a version John Maynard Keynes' "bancor", an international fiat currency based on the IMF's current special drawing rights (SDR).

Rooted in discredited economic thinking and a complete disregard for fundamental constitutional principles, the IMF over the years has forced American taxpayers to subsidize large, multinational corporations and underwrite economic destruction around the globe. IMF policies are based on a flawed philosophy that says the best means of creating economic prosperity is through government-to-government transfers. Such programs cannot produce growth because they take capital out of private hands, where it can be allocated to its most productive use as determined by the choices of consumers in the market, and place it in the hands of politicians. Placing economic resources in the hands of politicians and bureaucrats inevitably results in inefficiencies, shortages, and economic crises, as even the best intentioned politicians cannot know the most efficient use of resources. IMF assistance to foreign countries also has a history of funding graft and corruption among repressive regimes that leave their countries with massive debt to Western banks, with no economic progress having been achieved. As bad as the Federal Reserve has been in managing the dollar, I cannot imagine how much worse our monetary system would be with a single global currency issued and managed by the IMF.

Monetary problems come about because of the government monopoly on money issuance. Like any monopolist, government abuses its position and debases the currency it issues. Even inflating the currency supply by a seemingly paltry 2% a year results in a systematic debasement which severely penalizes savers and benefits debtors, including the greatest debtor of them all, the United States government. The ability to issue the currency in which its debt is denominated, combined with the ability to debase that currency so that the debt can be paid off with increasingly worthless money, gives rise to a temptation which no government official can resist.

To return to sound money, we need to return to the monetary system our founders intended. Gold and silver were to be the only types of currency which the states could declare to be legal tender, the government was not given a monopoly on currency issuance, and foreign coin could circulate just as freely as American coin. Rather than further centralizing currency issuance in an unaccountable international organization such as the IMF, currency issuance needs to be decentralized. The free market can provide currency just as it provides every other good. All that is needed is for government to remove the restrictions on private mints. Gold is gold no matter who mints it, and unlike paper money it cannot be created out of thin air. Gold-backed currency serves as the ultimate check on government spending and debt creation. Only by returning to commodity-backed currency can we return to fiscal and monetary sanity and break the cycle of booms and busts brought upon us by the Fed.

In conclusion, Mr. Chairman, this Committee has a great role to play in the future of our monetary system. We need to keep watch over the administration's negotiations with the G20 and vigorously oppose any efforts to force the United States into a new global currency, while simultaneously laying the groundwork for a return to sound money in this country.

Caution - Falling Currencies

Submitted by Keith Weiner

Caution: Falling Currencies

In 1913, the US Congress authorized the creation of the Federal Reserve.  Its mandate was limited, but it grew over time to become the central planner of all things monetary.  In 1933, President Roosevelt outlawed the ownership of gold.  In 1944, the soon-to-be-victorious allied powers signed a treaty at Bretton Woods, agreeing to use the US dollar as if it were gold.  Their central banks would hold dollars and borrow dollars, and pyramid credit in their own currencies on top of the dollar.

The US dollar was redeemable by foreign central banks, and so this was effectively a scheme for various currencies to have a fixed exchange rate between each other and to gold.  It, at least, had the virtue of limiting credit expansion, as there was still this one tie to gold and hence to reality.

The problem with fixing the price of one thing relative to another is that whichever one is undervalued is hoarded and whichever is overvalued is dumped.  The US government set the price of gold too low, and so foreign central banks were increasingly demanding delivery of gold.

By the time President Nixon was in office, something had to be done.  In 1971, he defaulted on the gold obligations of the US government.  This had the effect of severing gold from the monetary system, plunging us into the worldwide regime of irredeemable paper money.  One consequence was that the exchange rates of the various paper currencies were allowed to “float” against one another.

This was the prescription of Milton Friedman, monetary quack.  He actually said:

“If internal prices were as flexible as exchange rates, it would make little economic difference whether adjustments were brought about by changes in exchange rates or equivalent changes in internal prices. But this condition is clearly not fulfilled. The exchange rate is potentially flexible in the absence of administrative action to freeze it. At least in the modern world, internal prices are highly inflexible.”

And that’s why we have volatile foreign exchange markets today, because Friedman and his followers wanted to compensate for labor law and other regulation that make certain prices ratchet only upwards, but never downwards.

This fraudulent, unworkable, and dishonest scheme of floating exchange rates certainly did not fix the problem of wage and other price inflexibility.  It did cause several others.

One side effect was to loot people’s savings and thereby teach them not to save, because the word ”floating” is disingenuous.  The paper currencies all sink.  There is no mechanism, nor desire on the part of the central bank, to increase the value of the currency.

The floating currency regime is a regime of sometimes-slower and sometimes-faster currency debasement.  Each government engages in a race to zero.  Sometimes one currency is sinking relative to the others, and sometimes others are sinking relative to it.  This is enormously destructive.

The never-ending process of currency devaluation has a follow-on effect: reduced investment.  This of course reduces growth.  This premise must be taken to its logical conclusion.

Savings, as such, is not possible using irredeemable paper.

When saving, the wage earner sets aside a portion of his wage; he consumes less than he produces.   His basic intent is to hoard this value until he retires and needs to exchange it for food and other goods when he can no longer work.  It is advantageous to lend to a productive enterprise to increase his quantity of money, but this is not essential to the concept.  The key is that he can carry value over time.  Gold and silver do this, but paper does not.

Fundamentally, paper currency is a loan to the government.  Unlike a productive enterprise, government is not borrowing to increase production.  Government does not produce anything; it consumes.  Government is borrowing to consume with neither the intent nor the means to ever repay.  And therefore the “loan” is counterfeit (http://keithweiner.posterous.com/inflation-an-expansion-of-counterfeit-c...).  It will not be repaid.

Gold and silver are positive values.  One can hoard them, as one can hoard any tangible commodity.  Paper currency is a negative value.  It is debt.  There is no way to “hoard” it, its value is always falling, and in the end it will default to zero.

The government’s paper scrip loses value gradually, and then suddenly.  We are in the gradual phase now.  This phase will end without much warning (other than permanent gold backwardation:http://keithweiner.posterous.com/61392399).

Savings, under irredeemable paper is perverted into speculation.  People are forced to crowd into one asset bubble after another.  Those who blindly follow always end up transferring wealth to those who lead.  People who bought houses between 2004 and 2008 in the USA still have not recovered.  At least those who deposited dollars into a bank account have not lost as much, yet.  When the markets finally become aware that the banking deposits are backed by mortgages on homes which are worth 25% to 50% less than their mortgage values, bank depositors will lose more.

Eventually, people will discover that they cannot save in terms of dollars (those who don’t figure it out will be rendered economically irrelevant as their wealth is removed from their hands).  Savings is a necessary prerequisite for investment.  Investment is necessary for companies to grow, to develop new technologies, products, and markets.  Growth is necessary to hire new workers.

As existing companies achieve higher productivity of labor, and do not need as many workers to perform the same work, they lay off unneeded people.  In a free market, the unemployed would quickly be hired by growing companies that expand and develop new businesses.  But today’s structurally high unemployment can be traced back to Friedman’s quack prescription (among other government interference).

Weakening the currency not only discourages savings, it also weakens businesses who have to keep the currency on their balance sheet and who have to import some of their inputs.

When a currency loses value, then all who hold it incur a loss.  It is not possible to employ workers and run a business in a country without holding significant amounts of its currency.  Currency debasement therefore imposes constant losses on enterprises that try to operate in such an environment.

Combined with the fact that imported supplies, ingredients, parts, software, and other inputs are constantly rising in cost in terms of the falling currency, and one can see another reason why Friedman’s assertion is false.  In many cases, especially modern products, the cost of the labor input into a product is a small percentage of total cost.

Save your lunch money in gold and silver, the best way to protect yourself against our mad regime.  If you want to speculate, make sure you risk only your beer fun money.

Gold or Cash?